Chairman Arthur Levitt

U.S. Securities and Exchange Commission

Thank you very much. It is a great pleasure to be here
today. I want to thank Irv Weiser, Marc Lackritz and everybody
at the SIA for welcoming me.

This year's SIA theme -- the importance of leadership in
meeting future challenges -- couldn't be more timely. Today,
challenges abound. The past year is a striking example.
Unprecedented growth has been tempered by the discipline of the
market. Global economic uncertainty is no longer a distant
academic discussion or vague policy concern, but a very real
factor affecting an investor's bottom line.

Market risk and economic uncertainty caught millions of
individual and many institutional investors unaware. And,
throughout all of this, technology continues to revolutionize how
people invest, how brokers do business and how markets function.

For some, however, this revolution may be too much to
handle. I recently read about a French trader who sold 10,000
bond contracts on the Paris futures exchange -- without even
knowing it. This trader accidentally leaned his elbow on the F12
button and within a few minutes sold $1.3 billion of contracts.
The contract price fell and buyers moved in. The firm ended up
losing what it would only describe as several million dollars.

So, if you take anything away from my speech today it's
this: watch your elbows around the F12 button.

This morning, I would like to discuss with you the
challenges we collectively face on the eve of the 21st Century.
Many of these -- but certainly not all of them -- are born out of
five central themes: (1) technological advances, (2) the
emergence of a global economy, (3) the consolidation of financial
services, (4) a commitment to expand opportunity for all
Americans through our capital markets, and (5) the essential
elements of integrity and professionalism.

First, it's clear that technology is changing everything:
from customer service, to the clearance and settlement of trades,
to the very concept of what constitutes an "exchange." Every day
we see new products, new trading mechanisms, and new investors.
The benefits of technology are enormous.

But it does present us with significant questions: How do
we ensure that advances in technology do not outpace our ability
to protect investors adequately? How does the industry use
technology to meet the best interests of its clients as well as
its firms?

Second, in the last decade, we've seen an increasingly
connected global economy. Greater cross-border flows, new
sources of capital, cooperation and consolidation are all by-
products of globally integrated markets. This global economy, in
turn, demands that our regulatory framework -- worldwide -- be
continually re-examined and updated so that market creativity is
not stifled and investors are protected.

Third, today's financial landscape is as dynamic as ever.
Huge financial services companies, which offer everything from
bank accounts to mutual funds to insurance, tower over this
landscape. It's not unusual for a person today to go to such a
company as a customer, an investor, as well as a depositor.
Critical questions of regulation arise. How can we fashion a
regulatory response to best protect investors where there is a
multitude of regulatory authorities?

Fourth, our country is the most diverse nation in the world.
That has been and will be the key to America's strength. The
21st Century must be defined by opportunity for anybody willing
to work for it. As an industry, we have to do our level best to
reach out to new communities -- not only to meet the needs of new
customers -- but to recruit new employees. Our financial
community will be even stronger and our people more productive
and secure.

Finally, while it is clear that new opportunities summon new
challenges and that new possibilities bring forth new risks, let
us never forget that the fundamental credibility of our system
remains the single most important obligation. Trust and
professionalism should never be just catchwords in a company's or
firm's brochure. They must be defined through every broker's
contact with a customer, every lawyer's brief and every
accountant's financial statement.

Technology

Let me first discuss the imperatives of today's
technological revolution. Today, technological change represents
nothing short of a watershed transformation. In the past,
technology was driven -- for the most part -- by crisis or by
natural extensions of business. But going forward, technology
will more and more drive business instead of the other way
around.

Perhaps the most significant development is the way
technology is erasing the boundaries between our markets, and
even creating new alternatives. As the Internet and high speed
telecommunications become omnipresent tools, investors throughout
the world are gaining unprecedented access to markets and
instantaneous trading information. And they are doing it in ways
that were unimaginable a decade ago.

Let's look at the impact of technology on trading decisions.
Broker-dealers and institutional investors have long been
substantial consumers of technology. It has provided the tools
to help market players manage trading positions, and receive and
process the information critical to trading decisions.

But, now -- primarily through the Internet -- an average
individual investor has more power and information available at
his fingertips than ever before. Investors now have ready access
to information that up until a few years ago was available only
to securities professionals.

Websites routinely provide a seamless integration of news,
analysis and research. Not more than a few years ago, most
investors were checking stock prices in the next day's newspaper.
Today, thousands and thousands of investors are checking their
stocks two, three, four times a day through real-time stock
tickers on the Internet.

Want to be notified every time a certain company is in the
news? Simply type in the company name on a watch list and the
computer does the rest. What about access to the most recent
earnings forecast? Type in the company and you'll have it --
with accompanying charts and graphs.

What does this mean for broker-dealers? Technology is
allowing the average investor to eliminate or at least minimize
the middleman. As a result, broker-dealers will need to rely
more and more on income from value-added services rather than
from commissions. Such services may include advice, finding
deeper pools of liquidity or fine-tuning the wealth of
information on the Internet.

And, there is a tremendous amount of information to fine-
tune. The range of options available on the Internet is simply
mind-boggling. Indeed, if one were to click through ten new
financial Web sites a day, he could keep going for two and a half
years before exhausting the possibilities. And those are just
the sites posted in English.

The securities industry is clearly experiencing a dramatic
shift in how business is being conducted. For us at the SEC,
it's not enough simply to recognize these changes. We have to
respond to ensure that current regulations aren't stifling
innovation.

Simply put, changing markets demand changing regulations.
The SEC must have the capacity to respond to change. But we must
do so in a manner that -- above all else -- maintains our time-
honored standards of investor protection.

We have to be ever mindful of the fundamental reasons why we
regulate markets -- to protect investors; to minimize the
potential for manipulation, fraud and systemic risk. We regulate
markets to preserve their integrity and fairness. Those reasons
-- regardless of how technology changes the industry -- never
lose their salience.

Investors will continue to expect that markets will be
orderly and not subject to manipulation. They will continue to
expect that they will be treated fairly and uniformly -- no
matter how, where or with whom they trade.

Some may think that protecting investors and encouraging
innovation are mutually exclusive goals. I believe we have shown
that the two can -- indeed must -- go hand-in-hand. Recent
initiatives -- reforms to the securities offering process and our
so-called Broker-Dealer Lite initiative -- represent this
balance.

Earlier this month, the SEC unveiled a package of proposed
reforms intended to improve the capital raising process and
modernize the rules governing mergers and acquisitions. This
proposal would make capital formation and business combinations
more efficient and nimble, while, at the same time, giving
investors the information they need -- when they need it -- to
make more informed decisions. I look forward to hearing your
thoughts on this proposal over the next several months.
The rapidly growing over-the-counter derivatives market
presents enormous new benefits to investors -- and new challenges
to regulators. That is why the Commission just adopted a
streamlined regulatory framework -- dubbed Broker-Dealer Lite --
to allow American firms to compete more effectively in the global
marketplace -- without sacrificing the protection of investors.

Broker-Dealer Lite will give U.S. firms -- many of which
presently conduct their business overseas -- more flexibility in
structuring their OTC derivatives activities here. This, in
turn, will improve our oversight of an important portion of
securities firms' activities.

The future is now and it has brought a new reality. And,
that reality will more and more be defined by constant
technological change. Change can be disruptive. But, it can also
be full of unimaginable opportunity.

Global Capital Markets

The second force driving the securities industry -- the
growing integration of global capital markets -- represents this
dichotomy between disruption and opportunity.

Our country has, no doubt, benefited from the opportunity
and potential of the global economy. At the same time, however,
this increasing interconnectedness has made us more susceptible
to the impacts of economic and financial weakness half a world
away.

How can we best manage our interests in this dynamic, but
uncertain situation? We have been agents for change around the
world -- fostering shareholder-oriented capital markets in
developed and developing countries. Our experience proves that
reliable disclosure, transparent pricing, and effective, low cost
regulation are the essential ingredients for fair, strong
markets. We must continue to promote these values -- not just to
maintain our position -- but to spur growth and stability around
the world.

In recent months, we have seen what happens when foreign
investors become anxious. We've seen that economic turmoil in
Asia and the contagion it touched off in other emerging markets
have rewarded America's predictability with an even higher
premium.

No doubt, many of you have recognized a growing tendency
among exchanges to consolidate. I believe the cross-channel
linkage, for example, between the London Stock Exchange and the
Deutsche Borse in Frankfurt is likely to be a precursor for cross-
Atlantic and cross-Pacific partnerships. Already, NASDAQ is
discussing common links with foreign exchanges -- such as the
Hang Seng in Hong Kong and the Deutsche Borse.

While I'm optimistic of the enduring strength of America's
capital markets, we can
never afford to waiver in our pursuit of the highest quality
standards. Regulators, around the
world, need to ensure that any regulatory changes help investors
make the most of this evolution.

The current of globalization presents yet another challenge.
More and more of you are doing business with foreign
counterparties. But, do you know if your counterparties are
adequately capitalized? Can they meet their obligations? Do you
know, for example, if they are Y2K compliant?

If we enter into agreements without asking the right
questions and getting the right answers, we invite instability
and disruption. We invite large-scale losses that won't
necessarily be restricted to just the counterparties. It is
absolutely critical in this day and age that both counterparties
be sophisticated; that both know each other's constraints or
limitations.

Consolidation of Financial Services

Earlier, I discussed the prevalence of consolidation among
exchanges. But, the tendency to forge partnerships is occurring
here in this country, as well. As you all know, this past week,
the NASD and the AMEX announced that they have completed their
merger.

But, it's not just exchanges that are consolidating.
Mergers have also become a regular event for America's financial
firms over the last year. New multi-service companies have
sprung up -- comprising insurance, brokerage and banking
services.

Needless to say, this has provided both banking and
securities supervisors with a host of fundamental questions. I
have heard from many of you the same questions we are attempting
to answer. Why aren't we doing more to better coordinate with
the other regulators? Where are the regulatory boundaries?
What's the most effective structure to protect investors and
maintain the integrity of our markets?

In the months ahead, the SEC will continue to work
intensively with the banking regulators. We need to ensure that
our regulatory framework is protecting investors and promoting
efficient markets without hampering innovation and new models of
doing business.

As we adapt our regulatory framework in response to changes
in the marketplace, it makes sense at the same time to review the
effectiveness and efficiencies of the self-regulatory system. I
am encouraged by recent reports indicating that coordination
among SROs to reduce redundancy is improving. But, given the
imperatives of today's markets, we need to sustain our vigilance
in this area.

Opportunity and Inclusion

Up until now, I have talked about the new currents of change
sweeping the securities industry. They bring great promise for
our nation's future. But, if that promise remains a distant
dream for all too many Americans, we will never be a strong as we
can be.

There is no great secret to America's success. We have
grown -- not in spite of our diversity -- but because of our
diversity. We have employed our different experiences,
different backgrounds, different cultures, different races, and
different religions to create the most vibrant and dynamic
economy in the world.

Sadly, the financial sector has not done nearly enough to
promote greater inclusion in our markets. Our challenge is two
fold: one, we need to invite a broader spectrum of Americans to
participate in the markets; two, we need to reach out to young
people who might not otherwise consider careers in finance -- to
broaden their professional options.

Our country will grow only more diverse and this challenge
will become only more important. I ask that all of us join
together to encourage, teach, recruit, hire, mentor, retain and
promote members of minority communities.

Of all the things we can do, nothing compares to education -
- starting as early as possible. Reaching young minds, and
starting them thinking about the nature of the marketplace, can
help inspire a personal spirit of enterprise. That spirit will
serve them well throughout their lives. And, it will also make
the securities industry more productive, resilient and most
important, more trust-worthy.

Integrity and Professionalism

Our mission to expand opportunity to all is at the very
heart of the values that remain the bedrock of our current and
future strength: integrity and professionalism.

In this era of tumultuous change and uncertain outcomes, the
competing pressures of profitability and volatility can clash.
Accordingly, risk management and a firm's internal controls
become even more important.

We live in a complex world with complex structures and
complex rules. Responsibilities may overlap, objectives may run
counter to each other, demands may be at cross-purposes. In this
environment, not surprisingly, conflicts of interest are
sometimes inherent.

There are some practices I'm seeing that, quite frankly,
trouble me: brokers who are paid by their total output, instead
of the quality of their output. Brokers aggressively pushing
their own firm's mutual funds. Incentive compensation to push a
particular company's product without proper disclosure of that
compensation. Independent research being compromised to improve
the success of an underwriting. Brokers pushing stock that
their companies are underwriting.

The difficulty in eliminating such conflicts can never be an
excuse to turn away. Instead, it's a challenge. A call to rise
and meet the commitments not only to ourselves, but to each
other.

Today, I've talked about five challenges to the securities
industry as we approach a new century: the dramatic influence of
technology, the imperatives of a globalized economy, the trend of
financial consolidation, a greater commitment to diversity in our
markets, and the importance of maintaining the highest standards
of integrity and professionalism in the marketplace.

The market today is very different from when I first became
a broker. In fact, it has changed dramatically in the time I
have chaired the Commission. No doubt, the world will continue
to become smaller through improved communication and a greater
sense of collective interest. No doubt, technology will continue
to help create new sources of capital and new ways to move that
capital.

But, at its most basic level, I've come to learn that a
market represents an agreement between two people. For that
market to sustain long-term health, those two people must honor
that agreement. They must trust each other. They must treat
each other fairly. They need to clearly disclose risks and
conficts of interest. And, you can have all the technology and
global forces you want, but it's useless if basic trust does not
exist.

These principles transcend time and borders. As
transactions grow more sophisticated and products ever-more
complex, these principles become even more essential -- whether
your counterparty is a pensioner in Ohio or a multi-national
corporation in Geneva.

Our commitment to transparency, disclosure, opportunity and
trust is the backbone of our markets. If we remain faithful to
those ideals, the forces of change sweeping the globe can only
make us stronger.